SOCIAL TOPICS (Archive): ENVIRONMENT

Published, Summer 2003

"Here’s what companies’ directors have to worry about these days: accounting scandals ... earnings problems ... oh, and global warming."  (Wall Street Journal, 5/7/2003)

Emissions of greenhouse gases, most commonly carbon dioxide and methane, capture energy radiating from the earth and trap heat in the atmosphere. This threatens to create disastrous changes in weather patterns. The Intergovernmental Panel on Climate Change, established by the World Meteorological Organization and the United Nations Environment Programme, concluded in 2001 that “There is new and stronger evidence that most of the warming observed over the last 50 years is attributable to human activities.” (See chart, page 6.) The scientific assessment of the human contribution to climate change is now widely accepted, and legislation, regulation, litigation, and other responses to climate change are foreseeable.

In Walden’s Boston office, especially this past winter, it’s been hard to worry about anything as intangible as global warming. No doubt Bostonians would have celebrated the greenhouse effect, if only it could have quickened spring’s arrival. The sad truth, however, is that the impact of global climate change on weather patterns is anything but pleasant. Climate change creates unpredictable, extreme weather, greatly impacting water resources, agriculture, habitats and creating flooding, drought and desertification. Tropical pests like mosquitoes will be in their hayday, and with them such diseases as malaria, dengue, and river blindness. Coastal areas are already becoming uninhabitable from rising ocean waters and devastating typhoons. And, as with so many environmental problems, the impacts may be disproportionately felt by the poor, who have limited resources to adapt.

In 1992 the ratifiers of the United Nations Framework Convention on Climate Change, including the U.S., agreed to the principle that developed countries bear a greater burden for emissions reductions than developing countries. The Kyoto Protocol, negotiated in 1997, set differentiated reduction targets for each country. The U.S. agreed to, but did not ratify, a 7 percent greenhouse gas emissions reduction against a 1990 baseline. The Protocol will go into force when at least 55 countries representing at least 55 percent of global emissions ratify. At this writing, 109 governments have ratified, representing 43.9 percent of global emissions. Russia is expected to join this group in the summer, bringing the Protocol into force by the end of the year. Kyoto’s reductions will not stabilize the climate, but are seen as an important first step.

According to the United Nations Department of Public Information, the U.S. is the single largest emitter of greenhouse gases, accounting for 36.1 percent of global emissions. Shortly after President George W. Bush took office, he renounced U.S. involvement in the Kyoto Protocol. Instead, the U.S.’s program focuses on a voluntary system with market-based incentives.

The lack of firm guidelines is negatively impacting the long range planning capabilities of companies with traditionally large greenhouse gas emissions, such as vehicle manufacturers, the petroleum industry, and electric utilities. This includes the Clean Energy Group, a coalition of electric utilities, which has testified before Congress asking for legislation relating to climate change. As Frank Cassidy, COO of PSEG (Public Service Enterprise Group) stated “Our industry needs to know now what the future environmental requirements will be in terms of the amount of reductions and the timetable. The issue boils down to one of business certainty for both the electric power industry and the capital markets we turn to for financing of new generating projects.”

Despite the lack of legislation from the U.S. government, a wide range of companies are taking the lead and responding proactively to climate risk. Ford Motor identified climate change as a “key strategic environmental and business issue for the Company,” in its 2000 Corporate Citizenship Report. The company has conducted an independently verified emissions inventory, has set reduction targets, and is encouraging the emissions trading market. Ford still has a long way to go, and is aware of a need to lower the emissions created by the use of its products. Entergy has conducted an emissions inventory, set reduction goals, worked on internal and external reduction projects and, as a member of the Clean Energy Group, advocated for mandatory controls. Nike has stated; “Designing and mapping the metrics of things like CO2 emissions gives us a competitive edge and helps us achieve our goals for corporate world citizenship and profitability. Many companies don’t know what their CO2 footprint is.” The company has set reduction goals, designated staff specifically to the issue, sponsored external emissions reduction projects, reduced energy use internally and in its products.

As BP, the first company in the petroleum industry to accept the necessity of action on climate change, states on its web site, “It is not enough, however, to rely on the leadership of politicians. Business needs to play a responsible, active role and to show leadership in finding solutions and putting them into practice.”

Unfortunately, while some companies are voluntarily responding with increased attention to the issue, a lack of government leadership enables ExxonMobil, Unocal, Caterpillar, Southern Company (and the list goes on) in their laissez-faire attitudes. In the Carbon Disclosure Project 35 institutional investors (including Walden), representing over $4.5 trillion in assets, asked the FT500 Global Index companies to discuss their response to climate change and its associated risks. Over 220 companies responded to the questionnaire. Of these, 80 percent acknowledged climate change as a business risk and 35-40 percent had plans in place to decrease their exposure to these risks. The Project’s data indicates that companies without response plans are increasingly falling behind industry standards. Companies who wait for legislation are being left behind: in market opportunities, on the learning curve, and in preparation for the long-term risks of regulation and litigation.

Research is proliferating which shows companies taking steps to address the risks associated with global climate change will benefit from enhanced shareholder value. (See, for examples, CERES’s Value at Risk: Climate Change and the Future of Governance, WRI’s Changing Oil: Emerging environmental risks and shareholder value in the oil and gas industry, Claros Consulting’s, Sleeping Tiger, Hidden Liabilities.) Underscoring the risks relating to climate change, concerns are being expressed by industries not normally active on environmental issues. After witnessing the strong support that shareholders have given global warming resolutions Swiss Re, a leading reinsurance company, has issued a questionnaire to its customers asking about their preparedness to deal with potential greenhouse gas legislation.

For those companies needing additional encouragement, concerned investors filed 30 shareholder resolutions on climate change in 2003 at 27 companies. They include energy, transport and other industries. The early voting returns are unprecedented. As of May 30th, the following votes of support had been recorded: American Electric Power, 26.9%, General Electric, 22.6%, Canadian steel manufacturer IPSCO, 49%, TXU, 24.2%, ChevronTexaco, 32%, ExxonMobil, 22%. In addition, a coalition of state and city treasurers and comptrollers, representing approximately $130 billion in investments, will be convening a fall summit for investors to assess climate risks.

Despite the lack of U.S. legislative foresight on this issue, business remains under task to respond to climate change. Active shareholders are ensuring that their companies address this issue, by concentrating on the business risks associated with climate change and by showing consistently strong support for climate change related proxy resolutions. Apparently, investors just aren’t excited by the idea of vacationing at a seaside resort next to the Monte Carlo.

–M.Benton